It is said that everyone loves life insurance, but nobody loves the premiums. But what if we could limit your out-of-pocket cost and not affect your current cash flow or other invested assets?
Premium Financing does precisely that. A lender loans money to an ILIT which invests in a life policy and holds the policy as collateral until such time as the policy has accumulated enough cash to repay the loan. The policy is expertly designed so that the death benefit always equals the amount of the loan plus a significant death benefit for your family. Thus, when the loan is repaid the policy stays in force without additional contributions.
With careful and thoughtful design, after a period of time, the accumulated cash is generally enough to repay the loan and keep the policy in force until 100. At this time, the trustee will request a withdrawal from the policy and repay the loan. The collateral is then released and the ILIT/FLP owns the policy free and clear, with no income or estate taxes due upon death.
Why does this work? Loan rates on premium financing arrangements are tied to base indexes like LIBOR and are far less expensive than traditional financing rates for other loans. The difference between the interest on the loan and the crediting rate on the indexed universal life policy creates an arbitrage that works in your favor.